SEC Acts on Short-Sales Abuses

Amid intense political pressure, the Securities and Exchange Commission announced Monday that it is taking several steps to curb abusive naked short-selling.

The actions include making permanent an interim rule the SEC adopted during last fall's market turmoil, requiring broker-dealers to promptly buy or borrow securities to deliver on a short sale.

The SEC also said it is working with self-regulatory organizations to make short-sale volume and transaction data available to the public on SRO Web sites. This would enhance the amount of information already disclosed under another temporary rule currently in effect. This rule, which is to expire in August, applies only to certain institutional money managers and does not require public disclosure, the agency said.

Instead of renewing that temporary rule, the agency said it is pushing instead for broader disclosure of information to people outside the commission. This would be the first time that daily aggregate short-sales volume has been published, and the SEC said it hopes to make the information available in coming weeks.

"Today's actions demonstrate the commission's determination to address short-selling abuses while at the same time increasing public disclosure of short-selling activities that affect our markets," SEC Chairman Mary Schapiro said.

Short-selling, or borrowing and then selling shares in the hope the stock price will fall, has been blamed by many for driving down the prices of financial stocks. Of particular concern to some critics is naked short-selling, in which investors sell the stock without first borrowing the shares.

"Naked" short-sales are technically permitted because there is no legal requirement that a short-seller actually borrow the shares before making a sale.

The final naked short-selling rule requires broker-dealers acting on a short-seller's behalf to locate an entity that the broker believes can deliver the shares within three days after the trade. If investors or broker-dealers do not deliver shares within the three days, a "failure to deliver" is triggered.

If a failure to deliver is not closed out by the beginning of trading on the day after it occurs, the rule imposes penalties on broker-dealers, including a prohibition on effecting further short-sales in the same security unless the shares are both located and preborrowed.

Meanwhile, the information about short sales soon to be released by the SROs will show investors short-selling volumes in individual equities each day.